Transcript Currency Trading 101
Currency Trading 101 International Currency Investor Simulation David Mathews, Mira Loma High School Introduction We all know that money is anything which functions as a "medium of exchange." But in the world of international economics, currencies are more than that: they are a commodities that are traded back and forth just like stocks, bonds or other assets. In this simulation you will become a currency investor. Your objective is to hold the currency that will maximize your purchasing power at the end of each round. Good luck! Rules of the Simulation 1. You will start the simulation with a bank balance in US dollars. During each round of the game you can either hold your dollars or use them to purchase some other currency. 2. If you change currency, you must change it all. In the real currency markets you can hold many currencies at once, but not in our game. Changing currency means "buying" as many Brazilian Real or Argentine Pesos as $100 can get you, using the exchange rate at the beginning of each round. 3. You will be given information about the world economy during each round to help you make your decision. 4. You can only purchase candy with your currency using the end of round prices - when you find out if and how exchange rates have changed. 5. You must record all of your transactions on your bank balance sheet. 6. Each round starts with new money; you cannot carry a balance from one round to the next. Round 1 – Initial Exchange Rates Rate: $1 = 2R = 3P 1 Hershey Kiss = $100 or 200R or 300P This tells you that your initial $100 can buy 200 Brazilian Real or 300 Argentine Pesos Read the following headlines and decide whether you want to trade your currency. Round 1 - Headlines 1. The Brazilian government has announced that it will market generic AIDS drugs to poor nations throughout the world. 2. Street violence has broken out in Buenos Aires as unemployment and crime increase. 3. The US government announced that war time expenses will create budget deficits for at least the next three years. 4. Consumer confidence in the US has dropped 3% as a result of increasing government debt. Round 1 - Headlines 5. The Brazilian central bank has increased interest rates due to fears of inflation. 6. Business Confidence in Argentina has fallen by 10%. 7. Brazil’s economy is growing at 7% per year. 8. Argentina’s economy is shrinking at 2% per year. Round 1 – Make your Decision Now’s the time to decide whether you’ll hang on to US dollars or purchase a different currency. Record your transaction on your Currency Score sheet. You have less than 60 seconds. Rate: $1 = 2R = 3P Round 1 – Ending Exchange Rates New Exchange Rate: $1 = 1R = 4P This means that you may now buy a Hershey’s Kiss for the following prices: 100 US Dollars 100 Brazilian Real 400 Argentine Pesos Round 1 Debrief What happened? Why were some people able to buy 1 kiss while others could buy 2 kisses and still others couldn’t buy any? Which currency gained value? Which currency lost value? Why? What will you do differently in round 2? Round 2 – Initial Rates Rate: $1 = 1R = 4P 1 Hershey Kiss = $100 or 100R or 400P Our beginning point is the exchange rates as they stood at the end of round 1. Read the following headlines and make your decision. Round 2 - Headlines 1. Brazil has just elected a popular socialist politician as their new president. 2. Argentina has made a deal with the IMF and expects to attract foreign investors very soon. 3. The US Federal Reserve has raised interest rates in an attempt to slow the US economy. Round 2 - Headlines 4. The Brazilian government has announced a new tax on wealthy citizens – 50% of their income now goes to feed the poor. 5. The Chinese government has announced its plans to purchase Soy from Argentine farmers. 6. In the US scientists have finished the human genome project. Round 2 – Make your Decision Now’s the time to decide whether you’ll hang on to US dollars or purchase a different currency. Record your transaction on your Currency Score sheet. You have less than 60 seconds. Rate: $1 = 1R = 4P Round 2 – Ending Exchange Rates New Rate: $1 = 2.5R = 1P This means that you may now buy a Hershey’s Kiss for the following prices: 100 US Dollars 250 Brazilian Real 100 Argentine Pesos Round 2 - Debrief Which currencies lost value? Which currencies gained? Did any stay the same? As a currency trader, which concerns you more: what your currency is worth today or what it will be worth tomorrow? Round 3 – Initial Rates Exchange Rate: $1 = 2.5R = 1 P This means that if you change your currency from US dollars you can buy 250 Brazilian Real or 100 Argentine Pesos Round 3 Headlines 1. Brazil’s new president has made his first priority "that every Brazilian should get at least one plate of food each day." 2. A mild winter has allowed Argentine farmers to raise more wheat than ever before. 3. The US government announced today that private American firms can patent sections of the Human Genome to produce new medications. 4. The US economy shows signs of growth – factory orders have increased. Round 3 Headlines 5. Wealthy Brazilians have started to leave the country complaining they are being “taxed to death.” 6. China has made no announcements regarding soy being grown in Argentina. 7. The Brazilian president said to a TV interviewer “inflation isn’t so bad if you’re poor – it’s only the rich who suffer.” Round 3 – Make your Decision Now’s the time to decide whether you’ll hang on to US dollars or purchase a different currency. Record your transaction on your Currency Score sheet. You have less than 60 seconds. Exchange Rate: $1 = 2.5R = 1 P Round 3 – Ending Exchange Rates New Exchange Rate: $1 = 3R = 1P 1 Kiss = $100 or 300R or 100P Round 3 Debrief It’s all making sense now, right? Good. What would happen if we added another currency? Shall we find out? Round 4 – Initial Rates Rate: $1 = 3R = 1P = 45 Indian Rupees Kiss = $100 or 300R or 100P or 4500 Rup Round 4 Headlines 1. Brazil's economy has shown larger than expected growth as workers accept pay cuts to be more competitive in world economy. 2. Argentine workers go on strike. 3. US interest rates rise to 17% as Fed tries to stop inflation. 4. Intel announces a deal to design and produce chips in Bangalore, India. Round 4 Headlines 5. The Indian government announces that socialized medicine will continue, even though its costs are running higher than expected. 6. Ethnic violence between Sikhs and Hindus has escalated in Northern India. 7. The US has announced plans to invade Khazakstan because Osama Bin Laden has been seen there. 8. China is unhappy with India’s policy on foreign investment – they claim it favors the US and Britain. Round 4 – Make your Decision Now’s the time to decide whether you’ll hang on to US dollars or purchase a different currency. Record your transaction on your Currency Score sheet. You have less than 60 seconds. Rate: $1 = 3R = 1P = 45 Ind Rupees Round 4 – Ending Exchange Rates New Rate: $2 = 3R = 3P = 86 IR Kiss = $200 or 300R or 300p or 4300 IR Round 4 Debrief So what happened in round 4? Was it easier or harder to predict the changes? Why was it different? What does this make you think about the actual forex market, where up to 200 currencies can be exchanged? Final Debrief What is currency worth? What value are investors interested in? What determines currency values? Can you see any disadvantages to this system in which currency is traded as a commodity? Can you see any advantages?